February 5, 2016
by Meyer Sosland
Over the last four decades, the development of China’s animal feed industry has mirrored the pace and tone of the development of China’s economy as a whole. Today, the dramatic growth of China’s feed industry has slowed to a more tempered pace, while internal/governmental initiatives and the growing demand for animal protein are driving the industry to modernize and find efficiencies in its structure and practices.
A recent U.S. Department of Agriculture Economic Research Service (ERS) report, “Development of China’s Feed Industry and Demand for Imported Commodities,” details a progression of steps taken in the 1970s, ‘80s, ‘90s and the opening decades of the new century with strategic purpose to ensure the food security for the Chinese people.
It is the increase over the last 40 years in animal protein demand and consumption that has driven the growth of the Chinese feed industry, which has in turn made China the world’s foremost importer of soybeans, rapeseed, DDGS, sorghum, barley and fish meal. It has also helped to drive China’s farmers to plant more raw ingredients to sell to the feed industry.
As the ERS report notes, today China is the world’s largest consumer of feed ingredients, accounting for one-fifth of the total. China’s commercial feed output of 194 million tonnes in 2012 outpaced the U.S. and E.U. feed industries.
According to the ERS, China’s manufactured feed output grew to 198 million tonnes in 2014 from just 5 million tonnes in 1982. The industry’s growth paralleled that of meat and egg production, which grew from about 15 million tonnes annually in the early 1980s to 114 million tonnes in 2014.
The foundation of this dramatic growth was built in the 1970s.
Launching a feed industry
A pivotal year for China’s feed industry was 1978. This was a time when China’s economy as a whole was strictly controlled by central planning. Before 1978, the Chinese government had purchased equipment from Eastern Europe to build the nation’s first modern feed mills. The production of feed was limited.
At a meeting of China’s central leadership where broad market-oriented reforms were announced, livestock production was prioritized. The leadership determined that feed mills could transform raw materials into animal proteins more efficiently.
In 1979, the Thai company Charoen Pokphand (known in China as Zhengda) and U.S.-based Continental Grain became the first foreign ventures allowed in China. That these two companies were the first foreign companies allowed to operate in China was an indication of how important the feed industry was to China’s political elite.
As the ERS report noted, in the early 1980s a series of events critically important to launching the industry took place.
In 1980, technical experts were convened to develop strategies for expanding the livestock industry, and in 1982, Deng Xiaoping — China’s most important leader at the time — endorsed feed milling as a priority industry. It was in 1984 that China’s State Council formulated a strategic plan for the feed industry’s growth through 2000.
The ministries and bureaus of China were ordered to set up feed mills. The 1984 plan called for a series of moves to grow the feed industry. These included tax waivers, low tariffs and special allocations of foreign exchange to encourage imports of feed milling machinery and equipment.
The plan also called for utilizing non-grain feed resources, pasture, and marginal lands to support livestock, but it also recommended lowering tariffs on imports of feed ingredients with high protein content.
The earliest feed mills served state-owned farms and as the 1980s and 1990s progressed, village-based feed mills proliferated as small-scale livestock production began to grow. These small family farms had traditionally used on-farm feed materials for their animals. The growth in the number of livestock outpaced commercial feed production.
The ERS report noted that in 1995 China liberalized imports of non-grain feed materials including the elimination of import quotas for soybean meal, meal from other oilseeds, fish meal, distillers dried grains, bone meal, brans and husks of grains, byproducts of sugar and starch processing, and pulp or dregs from winemaking. In 1998-99, China cut a tariff and eliminated an import quota on soybean imports. The ERS report noted these steps were critical to increasing the supply of raw materials for the feed industry.
The 1990s saw the privatization of many feed mills as the Chinese government’s role in the industry declined and the nation’s grain market liberalized. The ERS report noted that as rural collectives and entrepreneurs started small mills using crude equipment and locally available raw materials, the number of feed mills rose from 9,000 to over 13,000 between 1991-96. By the end of the 1990s the government had moved away from direct involvement in the feed industry to issuing Five-Year Plans for the industry.
Modernization, new normal
As concerns about animal disease, food safety and the quality of meat and dairy products grew, a modernization campaign spread through the livestock sector. China’s 2005-10 Five-Year Plan helped to accelerate this modernization.
After 2007 there was a surge in complete, formulated feed output for swine. This reflected the modernization campaign’s emphasis on the substitution of commercial feed for locally procured materials. Between 1990-2012, poultry feed production grew more steadily as feed companies promoted vertical coordination in poultry production. Feed production for egg-laying poultry, aquaculture, cattle and sheep also grew rapidly during 2004-12.
ERS noted that an additional element of the new status quo was the nature of enforcement and regulations on food and feed safety, environmental protection and control of animal disease became much stricter. ERS said China’s Ministry of Agriculture withdrew the business licenses of 30% of feed mills during a 2014 relicensing campaign prompted by concerns about feed safety and quality.
A result of the increased concerns about food safety was a vertically integrated business model became a preference among meat and feed companies who sought to gain more control over supply chains and bolster consumer confidence in their products.
As large companies expanded, many small mills remained in the industry. The ERS report cited China Feed Industry Association statistics, which showed that China still had 10,113 feed-milling enterprises in 2013, nearly three times the 3,804 “above scale” feed industry enterprises — annual sales of $800,000 or over — reported by the economic census that year.
The top 10 companies accounted for just 36% of output. ERS noted the China Feed Industry Association estimated that five of the largest companies utilized roughly half their capacity that year.
ERS said that commentators had long cited chronic problems of excess capacity, crude equipment and low-quality products in the Chinese feed industry overall.
The Chinese government’s 2011-15 Five-Year Plan for the feed industry called for transforming China from a “big feed country” to a “strong feed country” by reducing the number of small mills with outdated facilities. The Ministry of Agriculture’s feed mill relicensing campaign during 2014 was ostensibly aimed at improving the safety and quality of feed, but it meshed with the objective of eliminating excess capacity by closing mills that lack modern equipment, quality control, and testing capacity.
For the next decade China’s feed industry is projected to grow at a more moderate pace. As more of China’s population moves into cities and achieves higher living standards, the consumption of animal protein will grow.
As the livestock and aquaculture segments modernize and grow to meet the demand, so will the commercial feed industry.
The ERS report noted that recent projections by the China Ministry of Agriculture projected 1.5% annual growth in the country’s feed industry output for 2014-24, much slower than the 8%-10% growth during the previous decade. Consolidation into larger companies with more vertical integration is seen as a possible outcome of the slowing growth. This could increase collaboration among companies, and improve products and customer service.
The development of the Chinese feed industry has turned it into the largest importer of corn and soy in the world.
It was in part a concern about China’s ability to produce enough raw materials to supply the livestock industry that drove the Chinese government in the 1970s to push for a modern commercial feed industry.
The ERS report noted that concerns about grain supplies in the mid-1990s led the country to lower the import barriers for oilseed meals, fish meal, distillers dried grains, bone meal, brans and husks of grains, byproducts of sugar and starch processing, and pulp or dregs from winemaking.
After some unintended consequences, the Chinese government decided to promote soybean imports for processing in China by restoring the VAT on imported soybean meal, eliminating quotas on imported soybeans, and cutting the soybean tariff to 3%. After that, China’s imports of soybeans grew from under 1 million tonnes in 1996-97 to over 70 million tonnes in 2013-14. Soybeans had become China’s largest agricultural import.
The ERS cited a statistical report compiled by China’s Feed Industry Association that the country’s feed mills consumed 187 million tonnes of raw materials in 2013. Corn accounted for more than half of the volume of materials used by feed mills. The feed mills reported using 34.7 million tonnes of soybean meal and 20 million tonnes of other high protein meals from cottonseed, rapeseed, fish and other beans. The 12.9 million tonnes of “other” raw materials includes distillers dried grains and other byproducts of industrial processing.
ERS noted that raw materials account for 80%-90% of Chinese feed miller’s costs. Chinese feed companies have responded to cost pressure by seeking alternative ingredients and by shifting feed milling operations from coastal provinces to grain producing regions. These conditions have led to the exit of many smaller feed companies.
ERS noted in the report the USDA anticipates that feed will account for most of the growth in China’s grain consumption over the next decade. The use of grain for feed is expected to increase by nearly 80 million tonnes from 2014 to 2024.
The consumption of grain for food or flour, industrial processing, and seed are expected to grow by less than 10 million tonnes over that period. The USDA projects feed will make up half China’s grain use by 2024 and soybean meal will be the chief source of protein for China’s feed industry. Soybean meal consumption is projected to increase by 26 million tonnes between 2014-24 while the use other types of oilseed meals will increase by less than 3 million tonnes.
The ERS report noted that China’s State Council’s Development Research Center has advocated addressing the growing demand for feed grains by relaxing self-sufficiency objectives for feed grains and oilseeds. China is addressing the rising costs and needs by developing new feed grain suppliers. They have reached agreements to allow corn imports from Ukraine, Argentina and Bulgaria and sorghum imports from Argentina.
A free trade agreement signed in 2014 will eliminate Chinese tariffs on Australian sorghum and barley.
The rising cost of feed has also been noted by ERS to contribute to rising imports of livestock-based food products. China’s trade agreement with Australia will eventually phase out tariffs on imports of beef and dairy products, and China has reached agreements with several countries in Eastern Europe to import cattle, sheep, and pork.
Chinese companies are buying companies overseas that specifically focus on meat and dairy production. A prime example of this is the purchase of Smithfield Foods by China’s Shuanghui Group in 2013
ERS noted China’s largest feed company, New Hope Group, has built feed mills in Vietnam and Russia, and it has acquired a beef operation in Australia.
As Chinese feed companies have moved into the livestock and food manufacturing industries, they are taking a serious look at animal protein production overseas where costs are lower.
The ERS report noted that some Chinese feed companies may establish operations in the United States or other countries where they have better access to raw materials.
As raw material and production costs rise in China, feed companies may shift from procuring raw materials overseas to processing meat and dairy products in countries with lower feed costs.
Highlights of China’s feed industry development
-1974-75 – First modern feed mills were constructed in Beijing and Shanghai.
-1978 – The Commerce Ministry set up a Feed Bureau and built 143 mills by 1980. Agricultural departments, industry bureaus, and rural townships built mills as well.
-1979 – Feed-milling and livestock ventures by Charoen Pokphand (known in China as Zhengda) and Continental Grain were the first foreign companies permitted to operate in China.
-1982 – Leader Deng Xiaoping endorsed feed milling as a key industry.
-1984 – The government drafted a plan to expand feed industry production capacity to 100 million tonnes by 2000. Support measures included exemptions from value-added tax and business tax, earmarked bank loans, reduced tariffs on raw materials, imports of equipment, and subsidies. Authorities budgeted 1.5 billion yuan for feed industry support during the seventh Five-Year Plan.
-1989 – The government’s “vegetable basket project” initiative charged municipal authorities with developing meat and feed production to supply cities.
-1990s – Privately owned feed mills expanded as the domestic grain market was liberalized.
-1995 – Tariffs were cut for imports of soybean meal, fish meal, and distillers dried grains, and imports were exempted from quotas and value added tax.
-2001 – WTO accession stimulated a wave of feed industry investment and lowered import barriers and restrictions on interregional trade and investment. Soybean tariffs were set at 3% with no import quota, while grains had tariff rate quotas.
-2005 – New Hope Group acquired a controlling interest in Liuhe Group, the most prominent in a wave of mergers and acquisitions.
-2006-10 – A renewed push for livestock industry modernization under the 11th Five-Year Plan prompted greater use of manufactured feed.
-2007-14 – A surge in pork prices and disease prompted more government support and private investment in swine production projects that included plans to supply feed to producers.
-2011-12 – Abuse of feed additives and hormones on swine and poultry farms alleged by Chinese news media increased pressure to increase vertical integration and coordination of livestock and feed production.
-2013-14 – Feed industry growth stalled with slower economic growth, H7N9 outbreaks, stricter regulations, and an anticorruption campaign.
-2014 – The Ministry of Agriculture reported closing 30% of feed enterprises after a re-licensing campaign.